For a lot of Australians, buying a home is still considered the bedrock of living the Australian dream despite the rapid growth in house prices in the past few years. And for some of those people who are laser focused on buying a property, they may consider rent “dead money.”
A recent report by Ernst & Young (EY), however, asks the question ‘is renting really dead money?’ It’s a valid question, and one that many people have been contemplating as uncertainty in the housing market continues. Here, we’re taking a look at the report and why, in some cases, renting can be better than buying for building wealth.
Societal views on renting
In EY’s report, the team surveyed Sydney residents to get their views on whether renting was a ‘waste of money.’ This survey returned unsurprising results with two out of three respondents answering that they thought renting was a waste of money.
A different view on building wealth
To demonstrate that there are other ways, beyond home ownership, to build wealth, EY completed some financial modelling. This modelling compared two scenarios. The first scenario was modelled on a person buying a home with a 20 per cent deposit (80 per cent loan-to-value ratio (LVR) for the property). The other scenario was modelled on someone renting a dwelling in the same suburb, but instead of buying they bought shares in an ASX200 index fund using a margin loan (at 50 per cent LVR).
Analysed over ten years from 1994 to 2017 for 43 suburbs around Sydney, the financial modelling compared the financial position of the renter to the home owner. Over these years, the renter put their cost savings into their ASX200 index fund holdings. These cost savings were the difference between rent payments and home ownership costs (loan interest, loan principal and repairs and maintenance).
Based on the financial modelling, the renter was financially better off for 62 per cent of each 10-year period of analysis. The results, however, are better for the home owner if the ASX200 index fund investment isn’t leveraged with a margin loan.
Shifting the way we think about home ownership
There are cases for and against each wealth-building scenario. EY’s study demonstrates that people can build wealth without owning property; however, it does take a healthy risk appetite to put in place especially when you’re exposed to the share market. Reports like EY’s also raise a critical discussion around our views on home ownership and what it means for building wealth. Home ownership is a deeply ingrained cultural norm in Australia that has stemmed from an era where society and the economy were very different from today. With research like EY’s, further questions about our cultural norms around housing and building wealth are being explored.
And if you decide to buy a property one day (whether to live in it or to turn it into an investment property) check out our article on 4 things you can do to increase your chances of a loan approval